Puerto Rico A Mess, But So Far Avoids Default

Despite the non-stop concern about Puerto Rico’s fiscal crisis, there’s at least one bit of good news: Its Electric Power Authority (PREPA) has managed to avoid defaulting on debt worth $415 million that was due earlier this week.

The utility said it paid the debt on time on July 1 in the form of $153 million in cash. The rest, it said, was from its debt-service reserve accounts. PREPA’s creditors responded by agreeing to buy $128 million in new bonds to enhance the utility’s liquidity. PREPA must pay them in full by December.

The government-owned PREPA owes about $9 billion and has obtained several extensions this year to avoid default because it hadn’t made all its payments.

A group of the company’s bondholders, meanwhile, said it would extend the debt payment deadline to Sept. 15, meaning it wouldn’t go to court to demand payment until that date. But it said any deal would be void unless PREPA reaches a deal to restructure itself by Sept. 1.

So far, good news for the utility, according to a statement issued by Lisa Donahue, its chief restructuring officer. “We are pleased we were able to reach an agreement that allowed us to make the payment to our bondholders today and avoid a default,” she said. “Today’s outcome would not have been possible without the support of the insurers and other creditors.”

The members of the creditors’ group also “are hopeful that we have established a foundation for reaching an equitable deal for all PREPA stakeholders, which will help the island in its revitalization,” according to one of their advisers, Stephen Spencer, a managing director with the Los Angeles investment bank Houlihan Lokey.

But PREPA’s financial status still isn’t yet particularly rosy, according to Vicente Feliciano, president of Advantage Business Consulting in San Juan. He told The Associated Press that the utility’s liquidity problems remain. “To be able to pay its creditors, it required a loan from those same creditors,” he said. “Negotiations have become quite tense.”

PREPA, the chief source of electricity for the U.S. territory, is swimming in debt due to customers’ unpaid bills and the utility’s reliance on old power plants with obsolete technology. And despite the July 1 deal, which increased the value of PREPA’s bonds, the company is still trying to renegotiate $9 billion in debt to give it the cash it needs to improve its performance as a utility.

“They seem to be making progress toward a more comprehensive type of agreement,” Joseph Rosenblum, director of municipal credit at AllianceBernstein Holding in New York, told Bloomberg. He said PREPA’s negotiations with its creditors could help alleviate the utility’s debts and thereby make restructuring easier.

PREPA’s moves to avoid default came during a week when other economic news from Puerto Rico was far less optimistic. The island’s governor, Alejandro Garcia Padilla, said he hopes to be able to delay making payments on at least some of the $72 billion in debt that his government has amassed.

But on July 1, only a few hours after PREPA averted default, Moody’s Investors Service cut its rating for about $56 billion worth of Puerto Rico’s bonds into deeper junk status, saying their holders risk “significant loss” even if their holdings have “strong legal protections.”